Thursday, August 28, 2014

The California Court of Appeal, First District, recently held that a mortgage loan investor may be liable for the fraudulent omission by the originating lender under an aider and abettor theory. Additionally, the Appellate Court held that a servicer which undertakes review of a loan modification has a duty not to mishandle the application or make material misrepresentation about the status of the loan modification.

In October 2005 and January 2006, the borrowers (“Borrowers”) refinanced their homes by obtaining loans with negative amortization and prepayment penalties. The loans were subsequently sold, and the Borrowers sued the mortgage loan investor’s successor (“Investor”) for fraud and violations of the Unfair Competition Law (“UCL”) (Bus. & Prof. Code, § 17200 et seq.), alleging that they were induced to obtain loans by misrepresentations and concealment of material facts. The Borrowers also alleged that the loan servicer (“Servicer”) failed to exercise reasonable care in processing their applications for loan modifications.

On appeal, the First District began by analyzing whether the loan documents concealed the terms of the Borrowers’ loans. The Borrowers’ complaint alleged that the loans were designed to cause negative amortization, and the monthly payment amounts listed in the loan documents for the first two to five years were based entirely upon a low “teaser” interest rate which existed for only a single month, and which was substantially lower than the actual interest rate that would be charged. The Borrowers alleged that payments following the contractual payment schedule in the loan documents inevitably caused negative amortization, allegedly resulting in significant loss of equity and supposedly making it much more difficult to refinance the loan when coupled with the prepayment penalty.

Relying on Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, the Appellate Court held that reliance can be proved in a fraudulent omission case by establishing that the originating lender “had the omitted information been disclosed [the plaintiff] would have been aware of it and behaved differently.” Because the Borrowers alleged facts to show that they would have acted different had they been aware of the material loan terms, the First District concluded that the Borrowers sufficiently alleged a cause of action for fraud.

Next, the First District turned to whether the Investor could be held liable for alleged conduct by the originating lender. The Court answered in the affirmative. The Complaint alleged that the Investor was directly liable for the fraud as an aider and abettor because it dictated use of the supposedly deceptive loan documents by the loan originator, and it allegedly directly engaged in deceptive marketing of the option ARM loans at issue.

More specifically, Borrowers alleged that the originating lender would originate mortgage loans according to the terms set in place by the Investor. The Investor allegedly engaged in deceptive marketing of its pay option ARM by aggressively promoting the teaser rate, including television commercials emphasizing that the payment rate could be as low as 1%. The Investor also supposedly instructed its own loan officers to sell refinance loans by holding themselves out as experienced mortgage lending professionals specializing in helping people improve their financial situation.

As you may recall, “California has adopted the common law rule that liability may be imposed on one who aids and abets the commission of an intentional tort if the person knows the other’s conduct constitutes a breach of a duty and gives substantial assistance or encouragement to the other to so act.” See, e.g., Peel v. BrooksAmerica Mortg. Corp. 788 F.Supp.2d 1149, 1161 (C.D. Cal. 2011). The First District found that the Borrowers sufficiently alleged liability for fraud based on a theory of aiding and abetting because the Investor actively participated in the creating, designing and formulating of the loan documents and/or dictated the terms of the option ARMS loans sold to the Borrowers.

The Investor unsuccessfully attempted to argue, for the first time on appeal, that it could not be liable for the fraud committed by its predecessor because it did not assume the predecessor’s liabilities when it merged with its predecessor. However, the general rule of successor nonliability does not apply if the transaction amounts to a consolidation or merger of the two corporations. See, e.g., Fisher v. Allis-Chalmers Corp. Product Liability Trust (2002) 95 Cal. App.4th 1182, 1188. Because the Borrowers alleged that the Investor merged with its predecessor, the allegations are sufficient to defeat a challenge on the pleadings as to Investor’s successor liability.

The Lender also raised a statute of limitations defense, arguing that actions for damages based on fraud must generally be filed within three years after actual or constructive discovery of the fraud. Cal. Code Civ. P. § 338(d). However, the First District was not willing to hold as a matter of law that the Borrowers would have discovered the purported fraud earlier through reasonable diligence (e.g., in October 2005 and January 2006 when the loans were originated). Because the complaint alleged that the fraud was discovered in December of 2008, and because the original complaint was filed in August of 2011, the Appellate Court held that this claim was not barred by the statute of limitation. Therefore, the First District concluded that the Borrowers sufficiently pled a cause of action for fraud against the Investor.

The First District then turned to whether the Borrowers alleged a cause of action under the UCL. Having concluded that the Complaint alleged a cause of action for fraud, the same allegations were sufficient to state a cause of action under the UCL based on the defendants’ fraudulent conduct.

Finally, the First District examined the Borrowers’ cause of action for negligence in the servicing of their loans. The Borrowers alleged that the Servicer breached a duty of reasonable care owed to Borrowers by: (1) failing to review their loan modifications in a timely manner, (2) foreclosing on their properties while they were under consideration for a HAMP modification, and (3) mishandling their applications by relying on incorrect information.

Specifically, one of the Borrowers alleged that an employee of the Servicer told him that his loan modification application was rejected because his monthly gross income was inadequate. However, his paystubs showed his monthly gross income was more than twice the amount incorrectly described by the employee. Additionally, the Servicer allegedly made other miscalculations to the Borrowers’ income and falsely advised that no documents had been submitted for review when in fact documents were sent and received.

The First District reached its conclusion by analyzing the balancing factors recognized in Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1095-96. As you may recall, Nymark is commonly cited for the proposition that as a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money. However, the First District held that Nymark does not support the sweeping conclusion that a lender or servicer never owes a duty of care to a borrower.

Rather, the Appellate Court opined, Nymark requires the balancing of five factors: (1) the extent which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. Nymark, 231 Cal.App.3d at 1098.

In applying the balancing factors, the First District followed the court in Lueras v. BAC Home Loans Servicing, LP (2013) 221 Cal.App.4th 49, and held that while a lender or servicer does not have a duty to offer or approve a loan modification, “a lender does owe a duty to a borrower to not make material misrepresentations about the status of an application for a loan modification or about the date, time, or status of a foreclosure sale.” Luceras, 221 Cal.App.4th at 68.

Furthermore, according to the Appellate Court, the mishandling of the documents deprived the Borrowers of obtaining the requested relief. The Court noted that the injury to Borrowers is present under the allegations at issue in that the Borrowers lost the opportunity to obtain a loan modification, and there allegedly was a close connection between the Servicer’s conduct, and under the allegations at issue there was actual supposedly suffered because to the extent Borrowers otherwise qualified and would have been granted a loan modification.

Thus, the Court held that, under the allegations at issue, Servicer’s conduct in mishandling the application papers would have directly precluded Borrowers’ loan modification application from being timely processed. Moreover, the Court held there is public policy of preventing future harm to home loan borrowers as shown by the recent actions taken by both the state and federal government to help homeowners caught in the foreclosure crisis.

Notably, the First District did not attach moral blame to the Servicer’s alleged conduct because the facts are not clear at this stage of the proceeding. However, in light of the other factors weighing in favor of finding a duty of care, the Court noted that the uncertainty regarding this factor was insufficient to tip the balance away from finding a duty of care. Therefore, because Servicer allegedly agreed to consider modification of the Borrowers’ loans, the Court held that the Borrowers had alleged sufficient facts to demonstrate that the Servicer would have breached a duty of care by allegedly mishandling the Borrowers’ loan modification applications.

Accordingly, the First District reversed the judgment of dismissal as to Borrowers’ fraud, UCL and negligence causes of action. The matter was remanded to the trial court for further proceedings.

Wednesday, August 27, 2014

The U.S. Court of Appeals for the Ninth Circuit recently held that a TILA rescission claim that does not allege an ability to tender or an attempt the tender the non-rescindable balance due will survive a motion to dismiss, and that equitable tolling applies to the one year statute of limitations under Section 8 of RESPA, contrary to precedent from other courts.

Two mortgagors sued their mortgagee to rescind their mortgage loan, claiming that they were supposedly not provided with their TILA disclosures until three years after closing. Upon receipt of the TILA disclosures, mortgagors sued to rescind the mortgage under TILA.

The mortgagors also alleged that the seller from whom the mortgagors purchased the home allegedly falsely represented himself as a real estate agent, and also that there was an allegedly fraudulently inflated appraisal. The mortgagors argued that the allegedly inflated appraisal was a “thing of value” provided to the lender in exchange for more referrals of appraisal business from the lender to the appraiser, in alleged violation of Section 8 of RESPA.

The district court dismissed the TILA claim because mortgagors did not tender the value of their home equity loan before filing the lawsuit for rescission, and did not allege an ability to tender. The lower court dismissed the mortgagors RESPA claim because it was not filed within one year of the closing. There is no discussion in the opinion of the fact that the mortgage loan apparently was a purchase money loan.

The Ninth Circuit recognized that under established Ninth Circuit case law (e.g., Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003)), a trial court may require an obligor to tender or provide evidence of an ability to tender at the summary judgment stage.

However, rejecting the opinions of a number of other courts, the Ninth Circuit also held that it is not necessary for a mortgagee to allege an attempt to tender or the ability to tender the non-rescindable balance due under TILA, in order to survive a motion to dismiss. The Court stated that a mortgagee “can state a claim for rescission under TILA without pleading that they have tendered, or that they have the ability to tender, the value of their loan.”

The Court noted that dismissal is different than summary judgment because at the dismissal stage of a lawsuit, the lower court is without evidentiary development, whereas they have such evidence at the summary judgment stage. Thus, at the dismissal stage, the lower court is unable to determine if tender is necessary. The Ninth Circuit reversed the lower court’s dismissal of the mortgagors’ TILA rescission claim and remanded for further proceedings.

The Ninth Circuit further held that RESPA allows for equitable tolling, which acts to suspend the one year limitations period until the mortgagor discovers or had a reasonable opportunity to discover the violation. The court noted that equitable tolling is to be decided on a “case-by-case” basis. Accordingly, the Court reversed and remanded on this issue as well.

The issue of equitable tolling was one of first impression for the Ninth Circuit and this decision conflicts with other courts’ opinions, including the D.C. Circuit Court of Appeals in Hardin v. City Title & Escrow Co., 797 F.2d 1037 (D.C. Cir. 1986).

In addressing the RESPA allegations, the Ninth Circuit also expressly declined to rule on the issue of whether or not markups for settlement services provided by a third party are actionable under Section 8 of RESPA, as the issue was not first addressed in the lower court.

In addition, the Ninth Circuit also expressly declined to rule on the issue of whether an inflated appraisal would qualify as a “thing of value” under Section 8 of RESPA.

Tuesday, August 26, 2014

The California Court of Appeal, Second District, recently reversed a judgment which subordinated a senior lienholder to a mechanic’s lien where the senior lienholder completed its foreclosure after it had accepted a deed-in-lieu of foreclosure from the former owner. The mechanic’s lienholder argued that the doctrine of merger subordinated the senior lienholder when it accepted the mechanic’s lien. However, the Court held that “[u]nder well-established California law, the senior beneficiary’s lien and title ordinarily do not merge when a deed in lieu of foreclosure is given if there are junior lienholders of record.”

As you may recall, “[t]itle conveyed by a trustee’s deed [i.e., in a foreclosure sale] relates back in time to the date on which the deed of trust was executed. The trustee’s deed therefore passes the title held by the trustor as of that earlier time plus any after-acquired title, rather than the title that the trustor held on the date of the foreclosure sale. Liens that attached to the property after execution of the foreclosed deed of trust are therefore eliminated or ‘sold out,’ and the purchaser at the trustee sale takes title to the property free of those junior liens.” 1 Bernhardt, Cal. Mortgages, Deeds of Trust, and Foreclosure Litigation (Cont.Ed.Bar 4th ed. 2014) §2.99, pp. 2-111 to 2-112 (internal citations omitted.)

In contrast, “[a] conveyance by a trustor through a deed in lieu of foreclosure (as opposed to a foreclosure deed) passes title to the transferee subject to all existing liens … If the grantee is the beneficiary under [a] senior deed of trust, under traditional merger concepts, its lien would normally merge into its title and be destroyed, but this would have the effect of making its title subject to the (former) junior deed of trust, which is clearly not the result that [] parties intend.” Id. at §7.17, p. 7-23.

In 2008, Borrower purchased property with the proceeds of a purchase money loan from Lender. The loan was secured by a first-position deed of trust. Later in 2008, Borrower hired Contractor to make improvements to the property.

In 2009, Contractor recorded a mechanic’s lien against the property and filed suit for breach of contract and quiet title. Later, in September 2009, Lender recorded a notice of default and election to sell under its deed of trust, stating that Borrower was in default on the loan.

In November 2009, Borrower transferred the property to Lender by grant deed in lieu of foreclosure (the “deed-in-lieu”). The deed-in-lieu expressly provided that “[t]he Indebtedness shall remain in full force and effect after the date hereof. The interest of Grantee in the Property upon effectuation of the transfers, assignments or conveyances as provided in this Grant Deed shall not merge with the interest of Lender pursuant to the Loan Documents, but shall be and remain at all times separate and distinct, and the Loan Documents shall be and remain at all times valid and continuous liens on the Property.”

In December 2009, the trustee recorded a notice of trustee’s sale. In January 2010, Lender recorded a trustee’s deed upon sale, stating that Lender (i.e., the owner of the Property under the deed in lieu of foreclosure) was the foreclosing beneficiary under the deed of trust and purchased the Property at the foreclosure sale.

At trial, Contractor argued that Lender’s interest in the property merged with Borrower’s interest in the property when it accepted the deed-in-lieu. According to Contractor, due to the merger, Contractor’s lien on the property became senior to Lender’s lien on property. The trial court agreed, and held that “the mechanics lien has priority and was not extinguished by the sale of the property to [Lender].”

The California Appellate Court reversed the trial court’s judgment.

The Appellate Court noted that “[u]nder well-established California law, the senior beneficiary’s lien and title ordinarily do not merge when a deed in lieu of foreclosure is given if there are junior lienholders of record.” The Court relied upon the California Supreme Court’s decision in Davis v. Randall: “‘Merger is always a question of intent when the question is as to whether a mortgage lien is merged in the fee, upon both being united in the same person. Equity will keep the legal title and the mortgagee’s interest separate, although held by the same person, whenever necessary for the full protection of the person’s just rights. If there is an intervening mortgage the acquirement of the title will not operate as a merger.” Davis v. Randall (1897) 117 Cal. 12 (internal citations omitted).

The Appellate Court held that there was no evidence that Lender intended to subordinate its lien to Contractor’s lien. Accordingly, the Appellate Court reversed the trial court’s ruling, and held that “the foreclosure after acceptance of the deed was therefore valid and eliminated all junior liens, including plaintiff’s mechanic’s lien.”

Friday, August 15, 2014

The California Court of Appeal, First District, recently reversed the dismissal of a borrower’s allegations that a loan servicer supposedly refused to modify the borrower’s loan after the borrower allegedly complied with all conditions of a HAMP Trial Period Plan.

The First District held that a lender must offer a permanent HAMP loan modification if the borrower timely makes all trial period payments, if the borrower complies with the Trial Period Plan terms, and if the borrower’s representations on which the loan modification is based remain correct. In so ruling, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 and followed a line of cases beginning with Barroso v. Ocwen Loan Servicing, LLC (2012) 208 Cal.App.4th 1001.

In 2009, the borrower (“Borrower”) applied for a loan modification. Borrower’s loan servicer (“Servicer”) allegedly approved Borrower for the loan modification and told Borrower that he would receive a permanent modification after making timely trial payments.

Allegedly, Borrower timely made the trial payments, and Servicer allegedly informed him in January 2010 that the permanent loan modification would be ready in three days. Three months later, with still no written agreement, Borrower leased his home to a third party. In August 2010, Servicer allegedly informed Borrower that it was denying his home loan modification “because the home was not owner-occupied.”

Thereafter, Borrower allegedly obtained Servicer’s agreement to postpone the foreclosure sale several times in order to pursue the loan modification. In February 2011, supposedly without Borrower’s knowledge, Servicer transferred servicing of the loan to another servicer. In May 2011, the house was sold at auction. According to Borrower’s complaint, Servicer “‘knowingly planned and schemed … to transfer plaintiff’s loan to [the other servicer] and foreclose on [Borrower] behind his back in violation of dual tracking,’ all while lulling [Borrower] into complacency by pretending to pursue the permanent loan modification.”

Borrower’s complaint sought equitable relief and damages for an illegal trustee’s sale, breach of contract-promissory estoppel, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, unfair business practices, negligence, negligent misrepresentation, and an accounting. The trial court found the complaint failed to state a viable cause of action and sustained Servicer’s demurrers without leave to amend.

On appeal, the First District reversed the trial court with respect to Borrower’s breach of contract, breach of the implied covenant of good faith and fair dealing, wrongful foreclosure, and negligent misrepresentation causes of action. The First District determined that “if the borrower has made all required trial payments and complied with all of the TPP’s other terms, and if the borrower’s representations on which the modification is based remain correct, the lender must offer the borrower a permanent loan modification.”

In so holding, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 which Servicer had cited for the proposition that “a borrower’s compliance with a TPP does not give rise to a contract to permanently modify the original loan.”

In support of the trial court’s dismissal, Servicer argued that Borrower was not eligible for a modification because he was not living in the home. The First District disagreed and held that “HAMP Directive 09-01, requires only that the home must be the borrower’s primary residence, as evidenced by tax returns, credit reports and other ‘reasonable evidence … such as utility bills in the borrower’s name’ … [Borrower’s] allegation that he was temporarily renting out his home does not bar him from showing it was nonetheless his primary residence.”

Servicer also argued that “[Borrower could not] maintain a breach of contract or, indeed, any cause of action arising from the allegedly wrongful foreclosure, because he failed to allege he was willing and able to tender the full amount of the loan.” Again, the First District disagreed and held that “since [Borrower] did not default under the terms of the modified agreement, he was not required to tender his indebtedness to avoid foreclosure.”

With respect to Borrower’s claim for wrongful foreclosure, the First District held that the claim was also wrongfully dismissed “because its legal viability was dependent upon whether [Borrower could] allege … that [Servicer] foreclosed despite an enforceable agreement to permanently modify his loan.”

The First District also reversed the trial court’s dismissal of Borrower’s negligent misrepresentation cause of action. As you may recall, the elements of negligent misrepresentation are (1) the defendant made a false representation; (2) without reasonable grounds for believing it to be true; (3) with the intent to deceive the plaintiff; (4) justifiable reliance on the representation; and (5) resulting harm. (West v. J.P. Morgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792.)

In support of the trial court’s dismissal of Borrower’s negligent misrepresentation claim, Servicer argued that “banks owe their borrowers no duty not to misrepresent the truth ‘in the context of the loan modification allegations/discussions.’” The First District rejected Servicer’s argument.

The First District also reversed the trial court’s dismissal of Borrower’s cause of action for violation of Business and Professions Code Section 17200. As you may recall, Section 17200 permits civil recovery for “any unlawful, unfair or fraudulent business act or practice.”

In support of the trial court’s dismissal, Servicer argued that “the trial court properly sustained the demurrer to this cause of action because [Borrower] failed to allege a ‘predicate act involving a violation of some other statute.’” The First District disagreed and held that “because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition – acts or practices which are unlawful, or unfair, or fraudulent … In other words, a practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.” (citing Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.)

Alternatively, Servicer argued that “[Borrower] lack[ed] standing to bring an unfair competition claim because he [could not] allege he “lost money or property as a result of the unfair competition.” The First District disagreed and found that “the complaint also alleges that [Servicer’s] unfair and deceptive practices deprived [Borrower] of the opportunity to pursue other means of avoiding foreclosure, leading to the loss of his home and the equity he had in it. He sufficiently alleged standing under section 17200.”

Finally, Servicer relied on Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1155–1156 for the proposition that “the unfair competition law applies only to ongoing conduct.” The First District dismissed Servicer’s argument and explained, “That was the state of the law when Mangini was decided, but the following year the Legislature amended section 17200 to state that it applies to any unlawful “‘act or practice,’ presumably permitting invocation of the UCA based on a single instance of unfair conduct.” (citing Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632, 653.)

However, the First District affirmed the trial court’s dismissal of Borrower’s negligence claim and his breach of fiduciary duty claim.

With respect to the negligence claim, the First District noted that “[C]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” (citing Erlich v. Menezes (1999) 21 Cal.4th 543, 552, 553–554.) The First District held that because Borrower’s complaint was based upon the alleged breach of a written agreement, tort remedies were unavailable.

With respect to the breach of fiduciary duty claim, the First District held that the claim runs “afoul of the principle that ‘[n]o fiduciary duty exists between a borrower and lender in an arm's length transaction.’ [A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” (citing Ragland v. U.S. Bank Nat. Assn., supra, 209 Cal.App.4th at p. 206; Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.) Accordingly, the First District affirmed the trial court’s dismissal of Borrower’s claim for breach of fiduciary duty.

Friday, August 1, 2014

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of alleged violations of the federal Telephone Consumer Protection Act (“TCPA”) by a business in connection with its national marketing campaign through its ad agency that contracted with the telemarketer. The Ninth Circuit held that, based on the evidence, the business could not be held vicariously liable for the alleged TCPA violations because it did not control the telemarketer, openly authorize the telemarketer’s actions, or ratify the telemarketer’s actions.

An association of businesses (“Association”) sponsored a local sweepstakes promotion through its advertising agency (“Advertising Agency”). As part of the promotion, the Advertising Agency hired a separate provider of text-message based services (“Telemarketer”) which sent text messages regarding the promotion to consumers. One consumer who received a text message sued a business-member of the Association (“Business”) under the TCPA.

As you may recall, the TCPA provides that “[i]t shall be unlawful for any person … to make any call … using any automatic telephone dialing system or an artificial or prerecorded voice … to any … cellular telephone service.” 47 U.S.C. § 227(b)(1)(A)(iii). A defendant can be held liable under the TCPA either for its own actions (direct liability) and, under limited circumstances, can be held vicariously liable for the actions of others.

As you may also recall, a recent FCC ruling held that it is not “appropriate to limit vicarious liability to the circumstances of classical agency (involving actual seller, or right to control, of the telemarketing call) … Principles of apparent authority and ratification may also provide a basis for vicarious seller liability for violations of section 227(b).” In re DISH Network, LLC, 28 F.C.C. Rcd. At 6574, 6590 n.124.

The Ninth Circuit rejected that the consumer’s argument that the Business could be directly liable under the TCPA because the text messages were sent by the Telemarketer retained by the Advertising Agency. The Ninth Circuit noted that the consumer had “not presented any evidence … demonstrating that [the business] controlled the actions of the[] entities with respect to the campaign.”

The Ninth Circuit held that the Business could be vicariously liable under the circumstances of classical agency. However, the Ninth Circuit rejected that either the principle of apparent authority or the principle of ratification could provide a basis for vicarious liability of the Business.

With respect to the principle of apparent authority, the Ninth Circuit explained that apparent authority can only “be established by proof of something said or done by the [alleged principal], on which [the plaintiff] reasonably relied … Apparent authority exists only as to those whom the principal has manifested that an agent is authorized. There is, therefore, tort liability only if such a manifestation and its execution by the apparent agent results in harm.”

The Ninth Circuit held that the Business could not be vicariously liable for having extended any apparent authority because the consumer had “not shown that she had reasonably relied, much less to her detriment, on any apparent authority with which [the Business] allegedly cloaked the [Association], [the Advertising Agency], or [the Telemarketer].”

With respect to the principle of ratification, the Ninth Circuit noted, “[a]lthough a principal is liable when it ratifies an originally unauthorized tort, the principal-agent relationship is still a requisite, and ratification can have no meaning without it.” citing Batzel v. Smith, 333 F.3d 1018, 1036 (9th Cir. 2003) (footnote omitted). The Ninth Circuit found that the Business could not have ratified the text messages because the Telemarketer was not an agent of the business.

Accordingly, the Ninth Circuit affirmed the lower court’s dismissal of the action.

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